What is insider trading in stock market?

Have a query about stock markets? Searching for information about insider trading? Find advice from experts here.

What is insider trading and why is it illegal? Is insider trading limited to stock markets only or does it have a bigger scope? What happens when an employee unknowingly trades the shares of the company he is working for. Are there any insider trading regulations?

#142783

08 May 2017 21:21

Posted By: [Anonymous]

Points:

3 (Rs 3)

Insider trading is the trading of a public company's stock by employee or stock holder with access to secured information about the company. It is illegal in most of stock exchange countries. If convicted you can be sentenced to imprisonment for years and might have to pay fine too.Scope is of insider trading is up to business property like secured information of stocks, bonds which might benefit to individual for personal gain.AviLife Is Beautiful

Insider trading is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. Illegal insider trading refers generally to buying or selling a security, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, This is applicable to both the person who tipped the information and the person who got the tip.drrao always confident

Investors buy or sell stocks of companies by making their own conclusions about the company's growth and prospects and profitability and dividends and other benefits to investors from the information and accounts available to public through the companies' reports and balance sheets or press announcements made in public. These are available to anyone equally as it is in public domain. That is normal investment decision and normal trading .

However some people connected with the company are privy to some information before they are made public . If such people indulge in buying or selling the shares of that company in large volumes and to their advantage, then that is insider trading. Usually the top executives of the company, the chartered accountants auditing the company accounts , those who are close to these people have all chances to get the private and confidential information. Eve in the public made accounts and reports all may not be divulged and there may be some confidential matters only very few people know in detail. Such people can exploit that advantage and trade on the company's stocks for their benefit or benefit to their close people. That is insider trading.

If an employee or top executive of a company buys or sells the shares of his company , that alone does not constitute insider trading. Even an employee can buy or sell shares like any other investor, relying and based on information from the public reports and accounts making his own investment judgement. They can sell their shares obtained by ESOP benefits. That is not insider trading. But there are certain stipulations of reporting of shares traded by directors and top executives. The main reports and accounts of the company also discloses such information.

Insider trading is illegal and punishable because that gives the perpetrators an exclusive advantage and the level playing field is denied to a normal investor. The same can bring losses to ordinary investors and amounts to cheating. It is also against the confidentiality and exclusive privacy terms of the company and against the rules laid out by stock exchange and regulators.

Insider trading can be identified easily from the large and unusual volumes of trade even before any public report is made and there are no rational and logical reasons for the trade to occur at that time.

Sometimes the employees themselves may not involve in insider trading, but will enable others who are close to them indulge in trading by revealing information in their personal talk and divulging confidential matters. Such things can happen from the family members of the insider, friends, other personal contacts etc.

The restrictions, regulations and details about insider trading can be had from"SECURITIES AND EXCHANGE BOARD OF INDIA(PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015"

Insider trading can be defined as the trading of a company's stocks or other securities by such individuals who have access to confidential or non-public information about that particular company. Taking advantage of this privileged access is considered a breach of the individual's fiduciary (trustee) duties.

Some years ago, Rajat Gupta, an Indian-American businessman and philanthropist, was arrested in the US for insider trading. It is a criminal offence.Beware! I question everything and everybody.

Subscribe to Email

About IndiaStudyChannel.com

Being the most popular educational website in India, we believe in providing quality content to our readers. If you have any questions or concerns regarding any content published here, feel free to contact us using the Contact link below.